General Valuation Concepts and Principles

Introduction 31
Land and Property Concepts 31
Real Estate, Property, and Asset Concepts 33
Price, Cost, Market, and Value 35
Market Value 38
Highest and Best Use 39
Utility 40
Other Important Concepts 43
Valuation Approaches 44
Summary 47

International Valuation Standards Committee

30
 International Valuation Standards, Sixth Edition

International Valuation Standards Committee

General Valuation Concepts and Principles
1.0 Introduction

1.1 The experience of Professional Property Valuers and dialogue

among nations through the International Valuation Standards
Committee (IVSC) have demonstrated that, with few exceptions ,
there is com- mon worldwide agreement regarding fundamentals
that underpin the valuation discipline. Local laws and economic
circumstances may, on occasion, require special (and sometimes
limited) applications, but fundamentals of valuation methods and
techniques are generally similar throughout the world. It is an
objective of the International Valuation Standards Committee to
avow and promote these funda- mentals.

1.2 IVSC’s Standards, Applications, and Guidance Notes (GNs) are

based on these fundamentals, but it is the position of the Committee
that it is inappropriate to attempt to articulate all appropriate funda-
mentals within the body of each Standard. Instead, this section sup-
plements each Standard and provides an overview of fundamentals
that are particularly important to understanding the valuation profes-
sion and to applying the Standards.

2.0 Land and Property Concepts

2.1 Land is essential to our lives and our existence. Its importance
brings land into focus for consideration by lawyers, geographers,
sociolo- gists, and economists. As each of these disciplines relates
to land and to uses of land, the societies and nations of our world are
affected.

2.2 Valuation of land as if vacant or of land and improvements to or on

the land, is an economic concept. Whether vacant or improved, land
is also referred to as real estate. Value is created by real estate’s
util- ity, or capacity to satisfy the needs and wants of human
societies. Contributing to value are real estate’s general uniqueness,
durability, fixity of location , relatively limited suppl y, and the
specific utility of a given site.

Concepts & Principles/Introduction 31

2.3 Property is a legal concept encompassing all the interests, rights, and
benefits related to ownership. Property consists of the rights of owner-
ship, which entitle the owner to a specific interest or interests in what
is owned. To distinguish between real estate, which is a physical enti-
ty, and its ownership, which is a legal concept, the ownership of real
estate is called real property. The combination of rights associated
with the ownership of real property is, in some States, referred to as the
bundle of rights. The bundle-of-rights concept likens property owner-
ship to a bundle of sticks with each stick representing a distinct and
separate right of the property owner, e.g., the right to use, to sell, to
lease, to give away, or to choose to exercise all or none of these rights.

2.4 Ownership of an interest in items other than real estate is referred to as

personal property. The word property, used without further qualifica-
tion or identification, may refer to real property, personal property, or
other types of property such as businesses and financial interests , or a
combination thereof. (See Section 3 below and Property Types.)

2.5 Property Valuers, Asset Valuers, and Appraisers are those who deal
with the special discipline of economics associated with preparing
and reporting valuations. As professionals, Valuers must meet rigor-
ous tests of education , training, competence , and demonstrated skills.
They must also exhibit and maintain a Code of Conduct (ethics and
competency) and Standards of professional practice and follow
Generally Accepted Valuation Principles (GAVP).

2.6 Price changes over time result from specific and general effects of
economic and social forces. General forces may cause changes in
price levels and in the relative purchasing power of money.
Operating on their own momentum, specific forces such as techno-
logical change may generate shifts in supply and demand, and can
create significant price changes.

2.7 Many recognised principles are applied in valuing real estate. They
include the principles of supply and demand; competition; substitu-
tion; anticipation, or expectation; change; and others. Common to all
these principles is their direct or indirect effect on the degree of util-
ity and productivity of a property. Consequently, it may be stated that
the utility of real estate reflects the combined influence of all market
forces that come to bear upon the value of property.
 International Valuation Standards, Sixth Edition

3.0 Real Estate, Property, and Asset Concepts

3.1 Real estate is defined as the physical land and those human-made
items which attach to the land. It is the physical, tangible “thing”
which can be seen and touched, together with all additions on,
above, or below the ground. Local laws within each State prescribe
the basis for distinguishing real estate from personal property.
Although these legal concepts may not be recognised in all States,
they are adopted here to distinguish important terms and concepts.

3.2 Real property includes all the rights , interests, and benefits related
to the ownership of real estate. An interest or interests in real
property is normally demonstrated by some evidence of ownership
(e.g., a title deed) separate from the physical real estate. Real
property is a non-physical concept.

3.3 Personal property includes interests in tangible and intangible items

which are not real estate. Items of tangible personal property are not
permanently affixed to real estate and are generally characterized by
their moveability.

3.4 In accounting terminolog y, assets are resources controlled by an

enterprise as a result of past events and from which some future eco-
nomic benefits are expected to flow to the enterprise. Ownership of
an asset is itself an intangible. However , the asset owned may be
either tangible or intangible.

3.4.1 The future economic benefits embodied in an asset may flow

to the enterprise in a number of ways , e.g., through its use
either singly or in combination with other assets to produce
goods or services to be sold by the enterprise, through its
exchange for other assets, through its use to settle a liability,
or through distribution to the owners of the enterprise
(International Accounting Standards [IAS], F55).

3.4.2 An asset is recognized in the balance sheet when it is proba-

ble that the future economic benefits will flow to the enter-
prise and the asset has a cost or value that can be reliably
measured (IAS, F89).

Concepts & Principles/Real Estate, Property & Asset 33

3.5 International Accounting Standards for financial reporting distin-
guish among tangible and intangible assets. Of particular importance
are the following terms and concepts:

3.5.1 Current assets. Assets not intended for use on a continuing

basis in the activities of an enterprise. Examples include
stocks , obligations owed to the enterprise, short-term invest-
ments, and cash in bank and in hand. In certain circum-
stances real estate, normally treated as a fixed asset, may be
treated as a current asset. Examples include land or
improved real estate held in inventory for sale.

3.5.2 Non-current assets (fixed, or long-term, assets). These are

tangible and intangible assets which fall into the following
two broad categories:

3.5.2.1 Property, plant, and equipment. Assets intended for

use on a continuing basis in the activities of an enter-
prise including land and buildings; plant and equip-
ment; and other categories of assets, suitably identi-
fied; less accumulated depreciation. Property, plant,
and equipment are tangible, or physical, assets.

3.5.2.2 Other non-current assets. Assets not intended for

use on a continuing basis in the activities of an enter-
prise, but expected to be held in long-term
ownership including long-term investments; long-
term receiv- ables; goodwill; expenditures carried
forward; and patents, trademarks, and similar assets.
This asset category includes both tangible, or
physical , assets and intangible , or non-physical,
assets. Intangible assets are considered items of
intangible personal property, and may include
management and market- ing skill, credit rating,
goodwill, and various legal rights or instruments
(patents, trademarks, copy- rights , franchises , and
contracts).

3.5.3 Where either historic or current cost accounting conventions

are upheld, a distinction is drawn between operational and
investment assets. Operational assets are considered
requisite
 International Valuation Standards, Sixth Edition

to the operations of the going concern or corporation.

Investment assets that are owned by a corporation are con-
sidered extraneous to the operational requirements of the
corporate owner.

3.6 Accounting terminology differs somewhat from terms more

common to Valuers. Within the classifications discussed in para. 3,
Valuers are principally involved with fixed assets. Technically it is
the ownership of the asset, or the right of ownership, that is valued
rather than the tangible or intangible asset itself. This concept
distinguishes the eco- nomic concept of valuing an asset objectively
based upon its ability to be purchased and sold in a marketplace
from some subjective con- cept such as assuming an intrinsic or
other rioR-Market Value basis. The objective market concept does,
however, have special applica- tions for limited or non-market
property valuation as discussed in International Valuation Standard
2.

3.7 The term depreciation is used in valuation and in accounting, and

can lead to confusion. To avoid misunderstanding, Valuers may use
either the term depreciation or the term accrued depreciation in
Reproduction or Replacement Cost methods to refer to any loss in
value from the estimate of total cost new. Such losses may be cate-
gorised as attributable to physical deterioration , functional (techni-
cal) obsolescence, or economic (external) obsolescence. The term
accruals for depreciation denotes allowances made by accountants
as offsets to the original cost of assets under the historical cost con-
vention of some States, regardless of the basis for such allowances.
Importantly to Valuers, accrued depreciation is a function of the
mar- ket. Accruals for depreciation are a function of an accounting
con- vention and do not necessarily reflect the market.

4.0 Price, Cost, Market, and Value

4.1 Imprecision of language , particularly in an international
community, can and does lead to misinterpretations and
misunderstandings. This is particularly a problem where words
commonly used in a language also have specific meanings within a
given discipline. That is the case with the terms price, cust, market,
and value as they are used in the valuation discipline.

Concepts & Principles/Price, Cost, Market & Value 35

4.2 Price is a term used for the amount asked, offered, or paid for a
good or service. Sale price is an historical fact, whether it is publicly
dis- closed or kept confidential. Because of the financial capabilities,
motivations, or special interests of a given buyer and/or seller, the
price paid for goods or services may or may not have any relation to
the value which might be ascribed to the goods or services by others.
Price is, however, generally an indication of a relative value placed
upon the goods or services by the particular buyer and/or seller
under particular circumstances.

4.3 Cust is the price paid for goods or services or the amount required to
create or produce the good or service. When that good or service has
been completed , its cost is an historical fact. The price paid for a
good or service becomes its cost to the buyer.

4.4 A market is the environment in which goods and services trade

between buyers and sellers through a price mechanism. The concept
of a market implies that goods and/or services may be traded among
buyers and sellers without undue restriction on their activities. Each
party will respond to supply-demand relationships and other price-
setting factors as well as to the party’s own capacities and knowl-
edge, understanding of the relative utility of the goods and/or servic-
es, and individual needs and desires. A market can be local, region-
al, national, or international.

4.5 Value is an economic concept referring to the price most likely to be

concluded by the buyers and sellers of a good or service that is
avail- able for purchase. Value is not a fact, but an estimate of the
likely price to be paid for goods and services at a given time in
accordance with a particular definition of value. The economic
concept of value reflects a market’s view of the benefits that accrue
to one who owns the goods or receives the services as of the
effective date of valuation.

4.6 There are many types and associated definitions of value (for exam-
ples see IVSC Standard 2). Some defined values are commonly used
in valuations. Others are used in special situations under carefully
identified and disclosed circumstances. It is of paramount impor-
tance to the use and understanding of valuations that the type and
definition of value be clearly disclosed , and that they be appropriate
to the particular valuation assignment. A change in the definition of
 value can have material effect on the values that would be assigned
to properties.

4.7 Professional Valuers , who possess intimate knowledge of a property

market; understand the interaction of participants in the market; and
are, thereby, able to judge the most likely prices to be concluded
between buyers and sellers of property in that market avoid the
unqualified term value by preceding the term with some adjective
describing the partic- ular type of value involved. Market Value or in
some States Open Market Voice is the most common type of value
associated with prop- erty valuations and is discussed in International
Valuation Standard 1. Although common usage possibly dictates an
understanding that Market Vofoe is intended in the absence of a
statement to the contrary, it is especially important that Market Value,
or whichever basis of value is used, & clearly identified and defined in
each such assignment.

4.8 The value concept contemplates a monetary sum associated with a

transaction. However, sale of the property valued is not a condition
requisite to estimating the price for which property should sell if it
were sold on the date of valuation under conditions prescribed in
the definition of Market Value.

4.9 The Market Value of real estate is a representation of its market-

recognised utility rather than its purely physical status. The utility of
assets to a given enterprise or individual may differ from that which
would be recognised by the market or by a particular industry.
Therefore, it is necessary that asset valuation and reporting for
accounting, under the convention, which reflects the effects of
changing prices, distinguish between values recognised in the mar- ket,
which should be reflected in financial reporting, and non-market types
of values. Depreciated Replacement Cost (DRC) as defined in
International Valuation Standard 2 and as applied to specialised prop-
erties, can be considered an acceptable method used to arrive at a sur-
rogate for Market Value.

4.9.1 Considerations similar to those expressed above are applied to

the valuation of property other than real estate. Except where
DRC is appropriately applied, financial reporting will require
application of Market Value methods and a clear distinction
between such methods and Non-Market Value methods.
 International Valuation Standards, Sixth Edition

4.10 The total cost of a property includes all direct and indirect costs of
its production. If supplemental capital costs are incurred by a
purchaser subsequent to acquisition , they will be added to the
historical acqui- sition cost for cost accounting purposes. Depending
upon how the utility of such costs is perceived by the market, they
may or may not be fully reflected in the property’s Market Value.

4.11 A cost estimate for a property may be based on either an estimate of

reproduction cost or replacement cost. Reproduction cost is the cost
to create a virtual replica of the existing structure, employing the
same design and similar building materials. A replacement cust esti-
mate envisions constructing a structure of comparable utility,
employing the design and materials that are currently used in the
market. (In some States, the term modern equivalent asset is used to
describe a structure whose cost is estimated on a replacement basis.)

5.0 Market Value

5.1 The concept of Market Value reflects the collective perceptions and
actions of a market and is the basis for valuing most resources in
market-based economies. Although precise definitions may vary, the
Market Value concept is commonly understood and applied.

5.2 Market Value is defined as:

The estimated amount for which a property should exchange

on the date of valuation between a willing buyer and a will-
ing seller in an arm’s-length transaction after proper market-
ing wherein the parties had each acted knowledgeably, pru-
dently, and without compulsion.

5.3 It is important to stress that the professionally derived Market Value

estimate is an objective valuation of identified ownership rights to
specific property as of a given date. Implicit within this definition is
the concept of a general market comprising the activity and motiva-
tion of many participants rather than the preconceived view or vest-
ed interest of a particular individual. Market Value is a market-sup-
ported estimate developed in accordance with these Standards.

38 Concepts & Principles/Market Value

5.4 Real property is distinguished from most goods and services because
of the relatively longer period required to market what is a relative-
ly illiquid commodity in order to achieve a price that represents its
Market Value. This characteristically longer exposure time, the
absence of a spot market’ (a market in which commodities are avail-
able for immediate sale), and the nature and diversity of properties
and property markets give rise to the need for Professional Valuers
and Valuation Standards.

5.5 In some States, the legal term Fair Market Value is used synony-
mously with the term Market Value. Fair Market Value should not
be confused with the accounting term, Fair Value. (See para. 8.1
below.) The IVSC position is that the term Market Value never
requires fur- ther qualification and that all States should move
toward compliance with this usage.

6.0 Highest and Best Use

6.1 Land is regarded as a permanent asset, but improvements upon or to
the land have a finite life. Because of the immobility of land, each
real estate parcel possesses a unique location. Land’s permanence
also means that it will normally be expected to outlast uses and
improvements , which have a finite life.

6.1.1 The unique characteristics of land determine its optimal util-

ity. When improved land is valued separately from improve-
ments to or upon the land, economic principles require that
improvements to or on the land be valued as they contribute
to or detract from the total value of the property. Thus, the
Market Value of land based upon the “highest and best
use5’ concept reflects the utility and the permanence of land
in the context of a market, with improvements constituting
the dif- ference between land value alone and total Market
Value as improved.

6.2 Most properties are valued as a combination of land and improve-

ments. In such cases, the Valuer will normally estimate Market
Value by considering the highest and best use of the property as
improved.
 International Valuation Standards, Sixth Edition

6.3 Highest and best use is defined as:

The most probable use of a property which is physically

pos- sible, appropriately justified , legally permissible,
financially feasible, and which results in the highest value of
the prop- erty being valued.

6.4 A use that is not legally permissible or physically possible cannot be

considered a highest and best use. A use that is both legally permis-
sible and physically possible may nevertheless require an explana-
tion by the Valuer justifying why that use is reasonably probable.
Once analysis establishes that one or more uses are reasonably prob-
able uses, they are then tested for financial feasibility. The use that
results in the highest value, in keeping with the other tests, is the
highest and best use.

6.5 Application of this definition permits Valuers to assess the effects of

deterioration and obsolescence in buildings, the most appropriate
improvements for land, the feasibility of rehabilitation and renova-
tion projects, and many other valuation situations.

6.6 In markets characterized by extreme volatility or severe disequilibri-

um between supply and demand, the highest and best use of a prop-
erty may be a holding for future use. In other situations, where sev-
eral types of potential highest and best use are identifiable, the
Valuer should discuss such alternative uses and anticipated future
income and expense levels. Where land use and zoning are in a state
of change, the immediate highest and best use of a property may be
an interim use.

6.7 The concept of highest and best use is a fundamental and integral
part of Market Value estimates.

7.0 Utility

7.1 The key criterion in the valuation of any real or personal property is
its utility. Procedures employed in the valuation process have the
common objective of defining and quantifying the degree of utility
or usefulness of the property valued. This process calls for interpre-
tation of the utility concept.

40 Concepts & Principles/Utility

7.2 Utility is a relative, or comparative term, rather than an absolute
con- dition. For example, the utility of agricultural land is ordinarily
measured by its productive capacity. Its value is a function of the
quantity and quality of produce, which the land will yield in an agri-
cultural sense, or of the quantity and quality of buildings essential to
the agricultural operation. If the land has development potential,
however, its productivity is measured by how productively it will
support a residential, commercial, industrial , or mixed use.
Consequentl y, land value is established by evaluating its utility in
terms of the legal, physical, functional, economic, and environmen-
tal factors that govern its productive capacity.

7.3 Fundamentally , property valuation is governed by the way specific

property is used and/or how it would ordinarily be traded in the mar-
ket. For some property, optimum utility is achieved if the property in
question is operated on an individual basis. Other property has
greater utility if operated as part of a group of properties, e.g.,
properties owned and managed by a business enterprise such as a
chain of mul- tiple retail outlets, fast food restaurants , or hotels.
Therefore, a dis- tinction must be made between a property’s utility
viewed individual- ly and when considered as a part of a group. A
Valuer will regard the property as the market views it, whether as a
discrete entity or as part of an aggregate or portfolio. Typically, the
Valuer estimates and reports the value of the property as an
individual entity. If the value of the propert y, ‹aken as part of an
aggregate or portfolio, is other than its individual value, such value
should be considered and reported.

7.4 Free-standing properties that are self-contained, independent opera-

tions normally change hands on an individual basis and are valued
as such. Should such properties possess greater (or lesser) value
arising from a functional or economic association with other
properties , such
additional , or special, value may be addressed in the valuation
process and reported accordingly, pursuant to either the Valuer’s
own observations or in accordance with disclosed instructions from
a client. Any such value estimate should not, however, & referred to
as Market Value without a supporting explanatory statement.

7.5 An individual property may possess an addition , or special, value

above its value as a separate entity by reason of its physical or func-
 tional association with an adjoining property owned by others or
its attractiveness to a purchaser with other special interests. The
extent or amount of such additional, or special , value is generally
reported separately from Market Value.

7.6 Utility is measured from a long-term perspective , ordinarily over

the normal useful life of a particular property or group of
properties. However, there are times when particular property
may become tem- porarily redundant , otherwise removed from
production , adapted to an alternative use or function , or perhaps
simply idled for a pre- scribed period of time. In other instances,
external market circum- stances , economic or politics, may dictate
the curtailment of pro- duction for an indefinite period of time.
Valuations in such situations require special expertise and training,
and reporting should be done in accordance with International
Valuation Standards. Of particular
importance is that the Valuer should ensure that full explanation
and disclosure is made of the definition of value, data upon which
the valuation is based , and the extent of special assumptions or
limita- tions (if any) upon which the valuation is made.

7.7 Similarly, property may not have a readily discernible degree of

util- ity at the date of valuation because of external or economic
factors,
e.g , property situated in remote regions, in States experiencing
volatile market conditions, in States not having a market economy,
or in States experiencing a change in economic systems. The
reporting requirements under International Valuation Standards for
valuations under these circumstances call for full disclosure of the
definition of value , the data which supports the valuation , and the
extent to which special assumptions or limitations (if any) govern
the valuation.

7.8 A common effect of political or economic uncertainty is a change in

utility, whether in terms of capacity or efficiency. The Valuer’s
responsibility in such situations is to assess the market expectancy
of the time span for such events. Temporary shut-downs or
closures may have little or no impact on property or asset values ,
whereas prospects for long-term cessation of activities may result
in a perma- nent diminution in value. The property or asset valued
must be viewed in the light of all internal and external factors
bearing on its operating performance.
 International Valuation Standards, Sixth Edition

8.0 Other Important Concepts

8.1 The expression Market Value and the term Fair Value as it
common- ly appears in accounting standards are generally
compatible , if not in every instance exactly equivalent concepts.
Fair Value, rim account- ing concept, is defined in International
Accounting Standards and other accounting standards as the amount
for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s-length transaction. Fair
Value is generally used for reporting both Market and Non-Market
Values in financial state- ments. Where the Market Value of an asset
can be established, this value will equate to Fair Value. Where the
Market Value of an asset cannot be established, its value is arrived at
using a surrogate such as Depreciated Replacement Cost (DRC).

8.2 Specialised assets are those which rarely, if ever, sell in the (open)
market except as part of the business of which they are a part (the
business in occupation). Such assets may also be referred to as lim-
ited, or non-market, assets depending upon their degree of spe-
cialised design, configuration, or application. Where there is limited
or no directly comparable market information for Valuers to consid-
er, the valuation process may become more complex. However , it is
the Valuer’s responsibility to develop data and reasoning from the
market to support and/or explain the value conclusion. Although
each of the valuation methods may be applied , and all applicable
methods should be considered, the Depreciated Replacement Cost
(DRC) method is commonly applied to specialised assets. Where
possible, the Valuer develops land value, cost , and accumulated
depreciation estimates from market information , and explains the
basis for the value estimate.

8.3 Where normal market conditions are disrupted or suspended, or

where supply and demand imbalances lead to market prices that do
not meet the Market Value definition, the Valuer may face a difficult
valuation problem. By using the Market Value concept and defini-
tion, and by applying market data and reasoning to the valuation
process, Valuers ensure the relevance and usefulness of asset values
reported in financial statements. As availability and/or applicability
of market data decrease, the valuation assignment may require a

Concepts & Principles/Other Important Concepts 43

 higher degree of professional Valuer vigilance, experience, and
judgement.

8.4 A Valuer may be required to apply a particular definition of Market

Value to meet legal or statutory requirements. If so required, the
Valuer must make specific disclosure of the fact and describe the
impact of any differences upon the value estimated. Where an
assign- ment is undertaken in accordance with International
Valuation Standards, the term Market Value will always conform to
the IVS definition.

8.5 All valuation reports should make clear the purpose and intended
use of the valuation. In addition to other reporting requirements ,
where financial reporting is involved the report should specifically
identify the asset class into which each asset is placed and the basis
for such placement. Each asset class should be explicitly explained.

8.6 The estimation and reporting of property and asset values, and relat-
ed guidance, are the scope of these International Valuation
Standards, Applications , and related Guidance Notes. How the
results of valua- tions are to be compiled , conveyed , and
incorporated with the find- ings of other professionals is of crucial
importance to Valuers. Proper understanding of terminology is
essential for Valuers and those who read their reports. The sound
use of experience and expertise and cor- rect application of
methodology are also essential. These Standards
are intended to serve the common objectives of those who prepare
property and asset valuations and those who must rely on their
results.

9.0 Valuation Approaches

9.1 Valuations of any type, whether undertaken to estimate market
value or a defined non-market value, require that the Valuer apply
one or more valuation approaches. The term valuation approach
refers to generally accepted analytical methodologies that are in
common use. In various States these approaches may be referred to
as valuation methods.

9.2 Market-based valuations normally employ one or more of the valua-

tion approaches by applying the principle uf substitution, using mar-
 International Valuation Standards, Sixth Edition

ket-derived data. This principle holds that a prudent person would

not pay more for a good or service than the cost of acquiring an
equally satisfactory substitute good or service, in the absence of the
complicating factors of time, greater risk, or inconvenience. The
lowest cost of the best alternative , whether a substitute or the origi-
ns, tends to establish Market Value.

9.2.1 Market-based valuation approaches include:

9.2.1.1 Cost Approach. This comparative approach consid-

ers the possibility that, as a substitute for the pur-
chase of a given property, one could construct anoth-
er property that is either a replica of the original or
one that could furnish equal utility. In a real estate
context, one would normally not be justified in pay-
ing more for a given property than the cost of acquir-
ing equivalent land and constructing an alternative
structure, unless undue time, inconvenience, and risk
are involved. In practice, the approach also involves
an estimate of depreciation for older and/or less
functional properties where an estimate of cost new
unreasonably exceeds the likely price that would be
paid for the appraised property.

9.2.1.2 Sales Cumparisun Approach. This comparative

approach considers the sales of similar or substitute
properties and related market data, and establishes a
value estimate by processes involving comparison.
In general , a property being valued (a subject prop-
erty) is compared with sales of similar properties
that have been transacted in the open market.
Listings and offerings may also be considered.

9.2.1.3 Income Capitalisation Approach. This comparative

approach considers income and expense data
relating to the property being valued and estimates
value through a capitalisation process.
Capitalisation relates income (usually a net income
figure) and a

Concepts & Principles/Valuation 45

Approaches
 defined value type by converting an income amount
into a value estimate. This process may consider
direct relationships (known as capitalisation rates),
yield or discount rates (reflecting measures of return
on investment ), or both. In general , the principle of
substitution holds that the income stream which pro-
duces the highest return commensurate with a given
level of risk leads to the most probable value figure.

9.3 Non-market based valuations may apply similar approaches, but typ-
ically involve purposes other than establishing Market Value. For
example:

9.3.1 An enterprise/entity may apply a cost approach to compare

the cost of other buildings with the cost of a proposed build-
ing to the enterprise/entity, thereby ascertaining the bargain
or premium accruing a particular property at variance with
the market at large. This application focuses on a particular
property and what may be a non-market cost.

9.3.2 An owner of land may pay a premium price for adjacent

property. In applying a sales comparison approach to deter-
mine a maximum price that owner is willing to pay for adja-
cent land, a Valuer arrives at a figure that may well exceed
its Market Value. In some States, such an estimate is called
Special Purchaser Value.

9.3.3 An investor may apply a rate of return that is non-market

and particular only to that investor. In applying an income
capi- talisation approach to determine the price that investor
is willing to pay for a particular investment based on the
investor’s anticipated rate of return, a Valuer arrives at an
estimate of Investment Value or Worth rather than Market
Value.

9.4 Depreciated Replacement Cost (DRC) is an acceptable method used

to arrive at a surrogate for the Market Value of specialised
properties. The method is commonly applied in a valuation situation
involving a property for which there are no readily available or
otherwise depend- able market data to analyse in developing a
Market Value estimate.

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 International Valuation Standards, Sixth Edition

9.5 Each valuation approach has alternative methods of application. The

Valuer’s expertise and training, local standards, market
requirements, and available data combine to determine which
method or methods are applied. The reason for having alternative
approaches and meth- ods is to provide the Valuer with a series of
analytical procedures which will ultimately be weighed and
reconciled into a final value estimate, depending upon the particular
type of value involved.

9.6 Valuation approaches and methods are generally common to virtual-

ly all types of valuation, including real propels, personal property,
businesses, and financial interests. However, valuation of different
types of property involves different sources of data that appropriate-
ly reflect the market in which the property (and/or service or busi-
ness) is to be valued. For example, individual buildings are com-
monly sold and valued in the relevant real estate market whereas the
values of the shares of stock in a property company that owns a
num- ber of buildings are reflected by pricing in the relevant shares
mar- ket.

10.0 Summary

10.1 The International Valuation Standards are intended to facilitate

cross- border transactions involving property and contribute to the
viability of global markets by promoting transparency in financial
reporting. Emphasis is placed on the use of factual market
information from which informed professional judgements
regarding property valua- tions can be drawn.

Concepts & Principles/Summary 47

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